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The Future - What Lies Ahead?

Ed ManleyNov 16, 2017

There are three reasons why an economic instability is likely fast approaching. First, credit creation in the US has sopped. Second, for the last year or so China has been a major part of global growth and has now run out of money. Thirdly, the internal problems of Europe inhibit its ability to contribute meaningfully to global recovery. Combined, could these factors be leading us into a global recession?

Leveraged American consumers and corporations

The Economist found in their business cycle forecast in December that, although the US economy still had the room to grow, US consumers were key. If they continue to spend, then the problems will be held at bay, but if their spending slows, the economy hits the skids. Lack of investment in publicly held companies will trigger a lack of confidence and thus stimulate the negative factors that may lead to a recession.

Major purchases in the US have slowed, according to the Financial Times. Cars, houses, real estate in general have all slowed.

The US is running out of economic tools in order to boost the economy and prevent any further damage. The same can be said for the ECB and the Bank of England.

China is running out of road

It is not well-known that China had a minuscule recession in 2015 caused by squeeze in lending and fiscal shocks according to The Times. China issues a lot of debt to stimulate local and global growth, but this growth is built on a stack of cards. Can China produce and sell enough in order to remain a) a superpower; and b) a major support against global recession?

Economic revival of the Eurozone is far from self-sufficient

The economy of the Eurozone has shown some long-awaited signs of recovery lately. However, the recovery is keenly dependent on state of the world economy and on China.

China has become the main trading partner of both the EU and Germany. If these partners fail, then China will find itself in a sticky situation repaying its debt burden.

You add Brexit and inner turmoil amongst other less well-off members and you see a Europe in a frail and precarious position.

The Mother of all the banks, the World Bank, still feels the economy is on the up and will continue to grow. A recession simply will not be tolerated (The Times)

Economists at the Bank expect the UK economy to grow by 1.7pc this year. This is only slightly below last year’s expansion of 1.8pc, and up from a forecast of 1.2pc in January.

With a fragile but real recovery now underway, countries should seize this moment to undertake institutional and market reforms

Jim Yong Kim

Reasons to be cheerful. Jim Kim, president of the World Bank, said signs of stronger global growth were “encouraging”. CREDIT: BLOOMBERG

Jim Yong Kim, the president of the World Bank, said it was “encouraging” that the global economy was “gaining firmer footing”, though he warned that the recovery was not entrenched, and the threat of increased trade protectionism remained.

Dr Kim said: “With a fragile but real recovery now underway, countries should seize this moment to undertake institutional and market reforms that can attract private investment to help sustain growth in the long-term.”

From a purely mathematical perspective, we are closing in on a global recession. The mature business cycle of the US and the rising debt in China hamper the prospects of the global expansion.

Whether recession is dead ahead or somewhat further down the road depends crucially on China. If China slows, so does the global economy in tandem. China seems to hold the key to our global success of failure in the near term.

The US stock market crash or imminent crash, or possible crash, will also badly shake the world confidence in our ability to keep up a positive momentum, less impactful than China, but both together and we are in for a rough ride, in my opinion.

“The world economy needs to prepare for the worst. Especially, as the upcoming recession may turn out to be very different than anything we have seen in a long time.”